RJR's Brave New World

By CLAUDIA H. DEUTSCH

Published: September 17, 1989

Last week was not a happy one in the ''junk bond'' market. As the Campeau Corporation's highly leveraged empire started to crumble, fears - some might even say panic - about the fate of other companies that had gone private through junk bond-financed leveraged buyouts swept Wall Street. Junk bond prices plummeted, dragging down even bonds that analysts had thought safe.

Not surprisingly, a lot of eyes turned to RJR Nabisco Inc., the giant food and tobacco company that Kohlberg, Kravis, Roberts & Company took private four months ago in the biggest buyout in history. RJR's bonds have moved down along with the rest of the market, raising the big question: Can any company really handle $25 billion in debt?

RJR's early signs have been stellar - increased operating earnings, a flurry of new products, an effective cost-cutting program. But will that make the RJR deal a success? Or are Campeau's problems a harbinger of troubles at RJR?

Wall Street, apparently, still sees RJR as a good bet - the prices on RJR's bonds have not dropped nearly as sharply as they have on other issues. And Louis V. Gerstner Jr., the 47-year-old former American Express executive who signed on as RJR's new chief in April, exudes confidence. ''Yes, there is life, even excitement, after an LBO,'' he said.

But post-buyout life is not easy for RJR. The sale of its European food businesses, of Chun King and, most recently, of Del Monte has made the company even more dependent on tobacco and baked goods. Yet the tobacco unit, whose cash-gushing ability is one of the cornerstones on which RJR's debt service is built, continues to lose domestic share, particularly to the Philip Morris Companies.

RJR's cookie and cracker business is still dominant in its markets, but some analysts question whether the debt-ridden company will have the resources to keep it growing. And Mr. Gerstner and his new management team have discharged so many people - 300 at Atlanta headquarters, another few hundred at Nabisco Brands and 1,640 people at the tobacco company - that the remaining workers are in shock.

''We're getting a lot of calls from their workers and if ever there was an ideal opportunity to organize them, it is now,'' said Joseph D. Masterson, international vice president of the Bakery, Confectionery and Tobacco Workers International Union, which represents workers at every American tobacco company except RJR's R. J. Reynolds Tobacco Company unit.

Cash, of course, remains the biggest question mark. For now, the tobacco company continues to spew forth profit. And RJR got $2.5 billion, considered top dollar, for the five European food businesses it sold in June. But the $2.3 billion or so that RJR will probably get when the recent deals to sell the various chunks of Del Monte are finalized is about $500 million below what the company is said to have expected.

If interest rates soar, if the bond market plunges lower or if tobacco sales decline more, RJR may have to cut a lot further into bone than Kohlberg, Kravis had bargained for.

''I wouldn't be surprised if they have to sell Planter's,'' said one former RJR executive, referring to the RJR nut and snack division that, to date, has not been rumored to be on the chopping block.

Charles E. Hugel, chairman of Combustion Engineering Inc. and RJR's former non-executive chairman, has deeper worries. ''I am concerned about their ability to fund modernization, research, all the future-oriented things,'' he said. ''A lot will depend on what happens to interest rates, and on how well they stem their slide in tobacco.'' Different Signals

Still, it is hard to forecast doom at RJR. ''A lot of people said that RJR, because of its size, would be the LBO that shows the system has gone too far,'' noted Harbir Singh, an associate professor of management at the Wharton School. ''Instead, it is showing clear signs of working out.''

Indeed, while RJR posted a loss in net income in the second quarter because of the huge debt expense, operating income before good will amortization was up 24 percent, to $848 million, from the second quarter of last year, on an increase of just 4 percent in net sales. Management layers have been slashed, and many of the perks are gone: six of the 11 corporate jets have been sold, limousine bills have been halved, the corporate apartment in Manhattan's posh Essex House is no more.

''We are running to the bone,'' said H. John Greeniaus, chief executive of Nabisco Brands Inc. ''Before, we might have lived with 5 percent fat.''

But the austerity efforts have not been indiscriminate. Nabisco Brands, for example, expects to spend $350 million on marketing this year, the same level as in 1988. And although introducing new products means huge marketing costs, RJR has been sending them flying out the door - nine new items from the Planter's division last month, 12 from the Nabisco Biscuit Company this month and a cigarette called Chelsea, which supposedly yields a nice-smelling smoke, now in test markets.

''Everyone assumes our motivation for everything is the LBO, but most of what we're doing needed to be done before,'' said Mr. Gerstner. James W. Johnston, the new Reynolds Tobacco chief, agrees. ''The changes were not driven just by a need to save money but by a need to build a stronger company,'' he said.